Dodger Mania

Greece is a fairly small country, but for the past year it has been causing an awfully big uproar. Burdened by a pile of government debt that could force it into default (and the European banking system into a meltdown), Greece has had to adopt ever more stringent austerity plans in order to secure a bailout from the European Union. Explanations of how Greece got in this mess typically focus on profligate public spending. But its fiscal woes are also due to a simple fact: tax evasion is the national pastime.

According to a remarkable presentation that a member of Greece’s central bank gave last fall, the gap between what Greek taxpayers owed last year and what they paid was about a third of total tax revenue, roughly the size of the country’s budget deficit. The “shadow economy”—business that’s legal but off the books—is larger in Greece than in almost any other European country, accounting for an estimated 27.5 per cent of its G.D.P. (In the United States, by contrast, that number is closer to nine per cent.) And the culture of evasion has negative consequences beyond the current crisis. It means that the revenue burden falls too heavily on honest taxpayers. It makes the system unduly regressive, since the rich cheat more. And it’s wasteful: it forces the government to spend extra money on collection (relative to G.D.P., Greece spends four times as much collecting income taxes as the U.S. does), even as evaders are devoting plenty of time and energy to hiding their income.

Greece, it seems, has struggled with the first rule of a healthy tax system: enforce the law. People are more likely to be honest if they feel there’s a reasonable chance that dishonesty will be detected and punished. But Greek tax officials were notoriously easy to bribe with a fakelaki (small envelope) of cash. There was little political pressure for tougher enforcement. On the contrary: a recent study showed that enforcement of the tax laws loosened in the months leading up to elections, because incumbents didn’t want to annoy voters and contributors. Even when the system did track down evaders, it was next to impossible to get them to pay up, because the tax courts typically took seven to ten years to resolve a case. As of last February, they had a backlog of three hundred thousand cases.

It isn’t just a matter of lax enforcement, though. Greek citizens also have what social scientists call very low “tax morale.” In most developed countries, tax-compliance rates are much higher than a calculation of risks would imply. We don’t pay our taxes just because we’re afraid of getting caught; we also feel a responsibility to contribute to the common good. But that sense of responsibility comes with conditions. We’re generally what the Swiss behavioral economist Benno Torgler calls “social taxpayers”: we’ll chip in as long as we have faith that our fellow-citizens are doing the same, and that our government is basically legitimate. Countries where people feel that they have some say in how the state acts, and where there are high levels of trust, tend to have high rates of tax compliance. That may be why Americans, despite being virulently anti-tax in their rhetoric, are notably compliant taxpayers.

Greeks, by contrast, see fraud and corruption as ubiquitous in business, in the tax system, and even in sports. And they’re right to: Transparency International recently put Greece in a three-way tie, with Bulgaria and Romania, as the most corrupt country in Europe. Greece’s parliamentary democracy was established fairly recently, and is of shaky legitimacy: it’s seen as a vehicle for special interests, and dedicated mainly to its own preservation. The tax system had long confirmed this view, since it was riddled with loopholes and exemptions: not only doctors but also singers and athletes were given favorable rates, while shipping tycoons paid no income tax at all, and members of other professions were legally allowed to underreport their income. Inevitably, if a hefty chunk of the population is cheating on its taxes, people who don’t (or can’t, because of the way their income is reported) feel that they’re being abused.

The result has been a vicious circle: because tax evasion is so common, people trust the system less, which makes them less willing to pay taxes. And, because so many don’t chip in, the government has had to raise taxes on those who do. That only increases the incentive to cheat, since there tends to be a correlation between higher tax rates and higher rates of tax evasion.

Even while dealing with protests and open riots, the new Greek government is trying to change things. It is rationalizing its tax-collection system. It has simplified taxes and done away with some of the loopholes. And it has stepped up its enforcement efforts in ways large and small—tax officials have, for instance, been sending helicopters over affluent neighborhoods looking for swimming pools, as evidence of underreported wealth. These efforts have made some difference: the self-employed seem to be reporting more of their income, and the evaders have had to step up their game. (There’s now a burgeoning market in camouflage swimming-pool covers.)

But a social inclination toward tax evasion, once established, is hard to eradicate. One fascinating study, by the economist Martin Halla, showed that tax morale among second-generation American immigrants reflected their country of origin. And getting tough can backfire. Research suggests that overemphasizing enforcement can actually weaken tax morale, by making taxpaying seem less like a freely chosen part of the social contract.

The reason tax reform will be such a tall order for Greece, in sum, is that it requires more than a policy shift; it requires a cultural shift. Pulling that off would be quite a feat. But the future of the European Union may depend on it. ♦